Small IT firms bear the rupee brunt

INDIA INC ON BUYING SPREE

Weighed down by the rupee appreciation and a sharp increase in salaries, the profit margins of small- and mid-cap information technology companies have taken a hard knock in the quarter ended June. Analysts said the scene would not be any better for the other IT companies that are yet to declare their results.

A majority of these firms provide services, primarily to the US followed by Europe and the rest of the world. But the rupee has appreciated across all major currencies during the quarter "� 7.1 per cent against the US dollar, 4.8 per cent against the euro, and 5.8 per cent against the pound. Every 1 per cent rise in the rupee shaves around 35-50 basis points off the operating margins of firms.

Most of the firms reported a 10-30 per cent dip in their net profit compared with the trailing quarter's net profit figure.

In fact, Hexaware Technologies, which posted a nearly 26 per cent drop in its net profit compared with the previous quarter, has decided "not to provide further guidance till the rupee reaches a relatively stable level". Other firms are likely to follow suit. Some IT companies are reportedly planning to provide only "dollar guidance", though analysts said, "this is meaningless for Indian investors".

While a big IT major such as Tata Consultancy Services (TCS) could offset the rupee appreciation to some extent due to its hedging, the smaller players have not been as lucky. They have just about started to hedge against the rupee appreciation.

In all fairness, the first quarter (April-June) is a "seasonally weak" one for most IT firms, given that salary hikes would be effected. This time around, though, the rupee appreciation and a rise in visa costs added to the plight. The second quarter (July-September) should be much better, said analysts.

Meanwhile, the firms have managed to effect a hike in the billing rates by 3-8 per cent.

They have also improved their employee utilisation rates, managed wage cost by hiring more freshers and are moving to other geographies, where the currency impact is lower. The traditional levers of utilisation, onsite-offshore mix, employee rotation and scale efficiencies should kick in, but with a lag, said ABN-Amro analysts. The key differentiator, they added, should be how quickly the companies manage costs.